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Harry Cassin
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Marc Alain Bohn
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Bill Waite
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How confidentiality agreements obstruct compliance

Compliance requires lots of mid-course corrections. Those corrections are based on constant feedback that’s honest and accurate. That’s why attempts to impede feedback and complaints are always bad for compliance. And yet, confidentiality agreements (in their many different forms) are everywhere.

The SEC has exposed how companies misuse confidentiality agreements. In a startling string of enforcement actions, the agency sued companies for violating 2010’s Dodd-Frank Act. Rule 21F-17 of Dodd-Frank makes it unlawful for anyone to take “any action to impede an individual from communicating directly with the [SEC] staff about a possible securities law violation.”

According to the SEC . . .

  • BlackRock Inc. forced more than a thousand exiting employees to waive their ability to obtain whistleblower awards.
  • SandRidge Energy Inc. put language in a whistleblower’s separation agreement that prohibited the whistleblower from participating in any government investigation or disclosing information potentially harmful or embarrassing to the company.
  • NeuStar Inc. used severance agreements that impeded 246 departing employees from communicating information to the SEC.
  • Anheuser-Busch InBev used a separation agreement to stop an employee from continuing to voluntarily communicate with the SEC about potential FCPA violations.
  • Health Net Inc. and Blue Linx Holdings required departing employees to waive their right to recover money from any whistleblower claims they filed with the SEC.
  • KBR and Merrill Lynch used agreements that restricted employees’ ability to disclose information to government agencies.

From those enforcement actions — most of which the SEC brought between 2015 and 2017 — companies learned to write exemptions into confidentiality agreements. The exemptions allow employees to talk to the SEC and other enforcement agencies.

But I wonder. Can current or former employees who have signed confidentiality agreements ever feel safe when they call out a company’s alleged illegal or unethical behavior? Law prof Orly Lobel, an expert on the topic, said:

Despite these exemptions [for protected communications], employers threaten litigation even under those circumstances in which [non-disclosure agreements] would be void. New empirical studies show that employees are largely uninformed about these protections, and the routinely broad language of confidentiality clauses along with the threat of litigation chills even this protected speech.

And there’s a new problem. Most companies now include “non-disparagement” clauses in employment contracts and separation agreements. Typical non-disparagement language is especially broad and vague. It increases the chances employees will be confused about their rights and the consequences if they complain outside the company.

Here’s what a modern non-disparagement clause looks like (with my emphasis):

Employee understands and agrees that, as a condition for payment of the consideration described herein, employee shall not make any false, disparaging, or derogatory statements to any media outlet, industry group, financial institution or current or former employee, consultant, client or customer of the Company regarding the Company or any of its directors, officers, employees, agents or representatives or about the Company’s business affairs and financial condition; provided, however, that nothing herein shall prevent employee from making truthful disclosures to any governmental entity or in any litigation or arbitration.

Can ordinary employees ever be sure what they’re saying isn’t in some way “false, disparaging, or derogatory”? Can they know for certain their complaint isn’t a violation of the non-disparagement clause? Not likely.

Leaders are tempted to stifle criticism from insiders, and confidentiality agreements are a convenient tool. That’s true at corporations, as the string of SEC cases shows, and even at nonprofits and churches.

So, what can compliance professionals do about the chilling impact of confidentiality agreements?

They can review all non-disclosure and non-disparagement provisions employees (and soon-to-be ex-employees) are asked to sign. And they can make honest determinations whether the company’s proposed language (and the context in which the language is deployed) will or might impede the free flow of honest and authentic feedback.

That’s what gatekeepers do.

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